Congress enacted the APA in 1946. By then the Treasury had been issuing Decisions interpreting tax laws since 1790. The Bureau of Internal Revenue (BIR) had been issuing guidance, including regulations, since 1862. Scholars in the 1940’s struggled to reconcile long-standing formalist concepts that supported the practices of tax administration (for example, doctrines of reenactment, retroactivity and delegation of powers) with the newly minted formalist concepts created in the APA (for example, concepts of “rules” and “orders” “interpretative” and “legislative”). Until recently, courts had accepted these reconciliations and so had grown a body of administrative law that appeared to create exceptions for tax administration from general APA requirements. Recent scholarship has criticized this perceived exceptionalism. Recent court cases have shaken up the traditional formalist tax administration concepts, thus undermining the stability of tax administration. And no, that is not an overstatement, as the paper will show, using the recent Cohen case as an example of how taking APA concepts literally and unmediated by the traditional reconciliation will “prove too much” when applied to tax administration.
Traditional perceptions of tax exceptionalism from administrative law doctrines and requirements have been predicated on the importance of the tax code’s revenue raising function. Simultaneously, those who follow tax policy recognize that Congress increasingly relies on the IRS to administer government programs that have little to do with revenue raising and much more to do with distributing government benefits to the economically disadvantaged, providing economic subsidies for approved activities, and regulating outright certain economic sectors like nonprofits, pensions, and now health care. As Treasury’s attentions shift away from revenue raising and toward these other matters, the justification for tax exceptionalism from notice-and-comment rulemaking procedures and limitations on pre-enforcement judicial review fades. To demonstrate the shift, this paper will incorporate empirical analysis of Treasury regulatory activity over time.
Under section 706 of the Administrative Procedure Act, agency actions may be struck down if they are “arbitrary or capricious.” A fundamental part of judicial review under that standard is ascertaining whether the agency articulated a sufficient explanation for the choices it made in its rulemaking or adjudication. The Supreme Court has addressed this requirement in many cases over generations. E.g., Motor Vehicle Mfrs. Assoc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983); SEC v. Chenery, 318 U.S. 80 (1943), additional opinion, 332 U.S. 194 (1947). The issue continues to be troubling, however, as witnessed by the Court’s five-to-four decision in FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009), and the continued appearance of articles on the issue in major law reviews, e.g., Sidney A. Shapiro & Richard E. Levy, Heightened Scrutiny of the Fourth Branch: Separation of Powers and the Requirement of Adequate Reasons for Agency Decisions, 1987 Duke L.J. 387 (Eighteenth Annual Administrative Law Issue).
A gap exists in the literature as to the “reasoned explanation” requirement as applied to rulemaking and adjudication by the Treasury Department and the Internal Revenue Service. Over the years, this issue arose in scattered tax cases. E.g., United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982); American Standard, Inc. v. United States, 602 F.2d 256 (Ct. Cl. 1979); Georgia Fed. Bank. F.S.B. v. Comm’r, 98 T.C. 105 (1992). With the recent explosion of administrative law analysis in tax decisions, the issue is now arising with much greater frequency in tax cases. E.g., Dominion Resources, Inc. v. United States, 681 F.3d 1313 (Fed. Cir. 2012); Mannella v. Comm’r, 631 F.3d 115 (3d Cir. 2011).
No major law review has yet explored the “reasoned explanation” requirement in the tax context. The topic is worth such exploration because of its significance to tax and because the issue in the tax context can shed light on the issue in the contexts of other agencies, as illustrated by the following three aspects. First, many Treasury regulations are long, intricate, and involve numerous choices. This is true of other agencies as well. How does the nature of the regulation affect the degree of explanation required? How practicable is the requirement in such situations?
Second, like many agencies, Treasury/IRS engage in both rulemaking and adjudication. The courts’ treatment of the explanation requirement as to tax regulations has not been consistent with their treatment of the requirement as to IRS adjudications. Is such inconsistency inevitable? Can the treatments be harmonized?
Third, the clashing opinions in Fox, supra, raise the question whether the explanation requirement applies differently to independent agencies than to agencies more directly under the President’s control. As Professor Hickman’s article for this symposium will show, the mission of Treasury/IRS is changing dramatically. The agencies are evolving from a purely revenue-raising function involving mainly technical analysis (which arguably resembles the duties of independent agencies) to administration of a host of non-revenue welfare and regulatory functions (which arguable resemble the duties of non-independent agencies). Does the explanation analysis change depending upon the functions Treasury/IRS are serving? Does the viability or lack thereof in the tax context speak to its viability or lack thereof in administrative law generally?
The U.S. Tax Court, which has long been the principal venue for adjudicating tax disputes, spent the first 45 years of its existence as an administrative agency, although it has always had only judicial functions. That agency history has shaped its development in ways that have resulted in unwarranted differential treatment. One vivid, current example of this phenomenon relates to review of its decisions: Despite Congressional direction to the contrary, some appellate courts treat the Tax Court differently from the way they treat other trial courts.
Seventy years ago, in Dobson v. Commissioner, 320 U.S. 489, 502 (1943), in an effort to reduce the volume of appeals in tax cases, the U.S. Supreme Court held that appellate courts must defer to the Tax Court absent a “clear-cut mistake of law.” Five years later, Congress attempted to overturn the tax exceptionalism embodied in the Dobson rule, providing in Internal Revenue Code section 7482(a) that the Courts of Appeals “have exclusive jurisdiction to review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” Yet, some appellate courts still defer to the Tax Court on mixed questions of law and fact, citing the Dobson line of cases, even when they would apply de novo review to a decision by a district court.
In effect, those courts are still treating the Tax Court as an administrative agency, although it became an Article I court in 1969. The result is not just a live conflict among the circuits, but also an incentive for courts to avoid difficult questions of tax law by branding them partly factual and deferring to the Tax Court. This article will argue that the Tax Court, an adjudicative body that is not subject to the regulatory regime applicable to agencies, does not warrant such deference. Rather, in accordance with the Tax Court’s role in tax administration, its decisions should be subject to the same degree of review on appeal as decisions of the district courts.
The attitude—common among tax professionals—that tax is special (mostly because of its supposedly unique complexity), and that special legal rules should apply in the tax context, has been described and excoriated by scholars as “tax exceptionalism” or “tax myopia.” The Supreme Court dealt tax exceptionalism a grievous blow in its 2011 Mayo Foundation opinion, in which it held that the Chevron standard for determining the validity of regulations applied in tax just as it applied in other fields. One commentator gleefully celebrated Mayo as the death knell of tax exceptionalism: “The tax world finally recognized a stark fact of life in 2011: Tax law is not special.” This article offers—with numerous hedges and qualifications—a defense of the exceptionalists and of exceptionalism. It makes three points for the defense: (1) It’s not so much tax professionals who think tax is special; the view of tax as a thing apart is held most strongly by everyone else. (2) To the extent tax professionals do believe that tax is special, they resemble antitrust lawyers who think that antitrust is special, bankruptcy lawyers who think that bankruptcy is special, and so on. In other words, there is nothing exceptional about tax exceptionalism. (3) And, finally, to the extent tax professionals not only think tax is special but think it is more special than, say, antitrust lawyers think that antitrust is special, they may not be altogether wrong. Maybe tax really is just a little bit special, after all.
This Article examines the administrative law implications of choosing between regulations and legislation to establish a set of tax rules. Professor Aprill’s thesis is that, depending on the degree of deference afforded revenue rulings, and in particular, whether so-called Auer/Seminole Rock deference applies to revenue rulings interpreting regulations, promulgating these rules as a set of regulations will give the IRS greater power to police political intervention by exemp organizations than would legislation.